Smart Finance APP learned that CICC issued a research report stating that it maintains Tencent (00700) "outperform" rating. Based on the better-than-expected performance of the gaming business in 2024, CICC raised its 2024 Non-IFRS net profit by 1% to 204.6 billion yuan and target price to HKD 468. The bank predicts that the company's Q2 24 revenue will increase by 6% year-on-year to 157.6 billion yuan, Non-IFRS operating profit will increase by 19% year-on-year to 54.9 billion yuan, and Non-IFRS net profit will increase by 26% year-on-year to 47.2 billion yuan.

CICC's main points are as follows:

The bank raised its expected year-on-year growth rate of game income for the whole year to 6%.

The bank believes that Tencent's gaming business, both domestically and overseas, has strong resilience this year, mainly because: 1) in terms of overseas games, overseas subsidiaries such as Supercell and Riot game are actively reorganizing or adjusting operations, and old games like "Brawl Stars" have seen large increases in their revenue, and their revenue deferral period is longer; 2) Regarding domestic games, Tencent is using new games such as "Digging Gold" "Breakout from Dark Zone" "Ninja Naruto" and others to take the lead in vertical games, while the two flagship games "Honour of Kings" and "Peacekeeper Elite" achieved a positive year-on-year growth in revenue in March this year, forming a solid foundation; 3) New games also have better-than-expected performance, and the mobile game "DNF", which went live in May, has topped the iOS bestseller list for two consecutive months. The bank expects its first-month revenue to exceed 5 billion yuan, exceeding market expectations. Considering the above factors, the bank expects Q2 24 game revenue to turn positive, with a year-on-year growth rate of 4%. The increase in incremental game income of the mobile game "DNF" will begin to show in the second half of this year, and the bank expects the year-on-year growth rate of game revenue to be 6% for the whole year.

The growth rate of advertising and FBS business revenue slowed down year-on-year.

Advertising business: Video advertising relies on internal and external circulation to maintain high growth, while Tencent's advertising system actively promotes AI efficiency, but due to the bank's observation that e-commerce advertising industry investment is relatively cautious in Q2 24 and the high base last year, the bank expects advertising revenue growth to slow down to 14% year-on-year in Q2 24. FBS (Financial and Business Services): The bank believes that the financial business in Q2 24 faces a situation of high base last year and high penetration rate of commercial payment shares, and the year-on-year growth rate may slow down. Enterprise services performed slightly better. Cloud business improved revenue quality by promoting self-developed products, and the video advertising technology service fee is gradually increasing. The bank expects Q2 24 FBS revenue to increase by 6% year-on-year.

High-quality growth continues in 2024, and shareholder returns are certain.

Although the bank took into account the uncertainty of the macro environment, business sensitivity and adjusted the future revenue growth rate to a different extent in finance, enterprise services, advertising and other businesses, the company's gaming business showed strong resilience, largely offsetting the risk of future macro-sensitive business fluctuations. The bank predicts that the revenue in Q2 24 will increase by 6% year-on-year, with a gross margin of 52.7% and Non-IFRS operating profit expected to increase by 19% year-on-year. As for shareholder returns, Tencent's buyback plan of more than HKD 100 billion in 2024 is steadily advancing, and its investment companies with an estimated value of USD 120 billion (most of which are overseas assets) and the company's excellent profit-making ability can basically ensure its ability to operate overseas shareholder returns.

Risk

Macroeconomic uncertainty; gaming and incremental business are below expectations; costs or expense rates are higher than expected.